Is that the dying screams of the Euro I hear?Euro Falls as Germany's Merkel May Struggle to Revive Economy
Oct. 10 (Bloomberg) -- The euro fell the most in a week on concern a German government led by Christian Democratic leader Angela Merkel will struggle to push through tax cuts and labor law changes to revive Europe's largest economy.
Merkel, who won the battle with Gerhard Schroeder to become chancellor, may have to make concessions to satisfy Schroeder's Social Democrats, with whom she will govern in a coalition. Unemployment in Germany is hovering near the highest since World War II and economic growth stalled in the second quarter.
``The market has its doubts that the new German government is going to be able to proceed with the necessary economic reforms,'' said Marios Maratheftis, a currency strategist at Standard Chartered Bank in London. ``People aren't going to be buying the euro on the basis of this result, because we need to see some evidence that the new government will deliver.''
The euro declined 0.6 percent to $1.2054 at 11:48 a.m. in New York, from $1.2129 late on Oct. 7, according to electronic currency dealing system EBS. It fell to 137.75 yen, from 138.02, and is lower against 14 of 16 most active currencies.
Merkel will have to overcome the Social Democrats' objections to plans for tax and subsidy cuts and steps to reduce job security, intended to help tackle unemployment and cut the country's debt. Under Schroeder, Germany's 2005 budget deficit will violate the European Union limit of 3 percent of gross domestic product for a fourth year.
Persistent unemployment helped make Germany one of the four slowest-growing economies in the dozen-nation euro region over the past decade. Failure to lower joblessness may damp consumer spending and further slow growth, which economists predict will be as low as 1 percent next year.
``The reform-minded people in the market would have preferred Merkel to win outright and this is just a watered-down victory for her,'' said Grant Wilson, a currency trader at Mellon Financial Corp. in Pittsburgh. ``She's not going to have much power to push through her original platform.''
Merkel said Oct. 6 she'll give priority to job creation, debt reduction and a revamp of the checks and balances between the federal government and Germany's 16 states. The Christian Democrats want to abolish the veto power of labor unions over agreements between executives and works councils that seek to safeguard jobs.
Movements in currencies may be skewed today as the U.S. bond market is closed and markets are closed for holidays in Japan, Canada and Taiwan. Trading may be around 60 percent of average daily volume, said Gavin Friend, a currency strategist at Commerzbank AG in London.
``Some movements are being exaggerated given the low liquidity,'' said Brian Garvey, senior currency strategist at State Street Corp. in Boston, the world's largest custodian of investor assets with $7.9 trillion.
The dollar was bolstered by expectations that reports this week will show U.S. consumer prices rose the most in 14 years and retail sales rebounded in September.
The U.S. currency, up 10.5 percent against the euro this year, rose for the first day in three on Oct. 7 after a report showed the economy's job losses last month were less than expected, buoying expectations the Federal Reserve will continue to raise interest rates. Policy makers will tomorrow release the minutes of their Sept. 20 meeting.
``There are several big events that might help the dollar to assert itself this week,'' Commerzbank's Friend said. ``People are going to be pretty cautious in placing big bets for now.'' The dollar may reach $1.1975 per euro this week, he said.
A Bloomberg News survey showed that 51 percent of the 61 traders, strategists and investors surveyed on Oct. 7 from Sydney to New York advised selling the dollar against the euro.
Fuel Pushes Inflation
U.S. consumer prices probably rose 0.9 percent in September, following a 0.5 percent gain in the previous month, as fuel costs soared after Hurricanes Katrina and Rita, while retailers increased sales to Gulf Coast residents before and after the storms. The estimate of price increases is based on the median forecast of 64 economists surveyed by Bloomberg.
``We're due for a stronger inflation number and that could potentially support the dollar,'' State Street's Garvey said.
Interest rate futures indicate traders expect the Fed to lift interest rates three more times to 4.5 percent by January. The Fed has raised its key interest rate 11 straight times to 3.75 percent, as Europe has kept its benchmark at 2 percent for more than two years.
With inflation stirring and little evidence higher prices have curbed spending, Fed policy makers will continue to raise their target interest rate in the months ahead.
``The trend for the dollar to rise, backed by the prospects of higher rates in the U.S., will remain in place,'' said Keizo Tanaka, manager of the market trading department at Resona Bank Ltd. in Tokyo.
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